"To PSC or not to PSC?”…that is no longer the question. The Department for Business, Energy & Industrial Strategy (“BEIS”) has confirmed that a person that takes security over shares in a Scottish company must appear on the company’s Register of People with Significant Control (“PSC Register”).
As explained in our previous blog, the relevant PSC legislation provides a carve-out which, on the face of it, suggests that a person or entity that takes share security on typical terms does not require to be entered on the PSC Register as a person with significant control (“PSC”). However, there has been much uncertainty in the Scottish market as to whether this carve-out extends to a security holder that takes title to shares. In order to take valid security over shares in a Scottish company, it is necessary for the shares to be formally transferred into the name of the security holder when the security is put in place. This differs to the position under English law where there is no need for title to the shares to be transferred on day one, security takers typically relying on equitable security (a concept not recognised under Scots law).
BEIS has now confirmed to us that the carve-out in the legislation does not extend to a security holder that takes title to shares regardless of the timing of the exercise of control of any rights by the security holder. This means that details of any such security holder must be entered as a PSC on the PSC Register of the company whose shares have been pledged. Failure to comply with this statutory obligation is a criminal offence for the both the company and the security taker.
While this undoubtedly involves a degree of inconvenience*, the confirmation from BEIS allows us to progress with certainty.
What does this mean if you have taken security over Scottish shares?
Any individual or entity that knows (or ought to know) that it is a potential PSC must notify the company to that effect. As holder of security over Scottish shares, you have a statutory duty to notify any Scottish company whose shares have been pledged in your favour. You may face criminal sanctions for failing to do so. In addition, you are obliged to respond to any PSC related information requests you receive from the company: failure to do so may affect the enforceability of the share security.
In light of these possible implications, we would recommend you complete an audit of all Scottish share security held. In terms of future transactions, ensuring that you are compliant with the legislation is a simple process that can be managed as part of the completion process.
What does this mean if shares in your Scottish company have been pledged in security?
You must include on your PSC register both details of your shareholder(s) and any party in whose favour share security (on typical terms) has been granted. If those entities are registered at Companies House, this information will be readily available to you however, if the potential PSC is not, reasonable steps should be taken to identify it. To do this, you must give notice to the PSC seeking confirmation of their details. The PSC has a statutory duty to respond to an information request; failure to respond permits you to issue a warning notice. The PSC then has a month in which to respond to the notice failing which, you may (at your discretion and subject to any contractual agreement not to) issue a restrictions notice.
Our team has in-depth knowledge to keep you compliant and ensure that you meet all of your statutory compliance obligations. A copy of our client guide, which gives an overview of the PSC Regime and the information which companies and LLPs need to include in their registers, can be found here.
If you have any questions please contact any of our team on the details below.
*BEIS has advised that they will be reviewing the PSC legislation in Spring 2019 and encourages businesses to provide feedback.